Healthsouth's shares take ill

Lower Medicare reimbursements spark spinoff move

By

MikeMaynard

BIRMINGHAM, Ala. (CBS.MW) -- Shares of Healthsouth Corp. lost nearly half their value Tuesday after the company withdrew its profit forecasts for 2002 and 2003 and announced plans for a sweeping restructuring.

Expectations for lower Medicare reimbursements to be paid for outpatient therapy precipitated the moves.

Healthsouth
HRC, +0.19%
wants to set up its outpatient surgery division as a new publicly traded company while also exploring "potential divestitures and other strategies," said Chairman and Chief Executive Richard Scrushy. The company hired UBS Warburg as its financial adviser.

"We're very excited about this," Scrushy said of the spinoff on a conference call. But investors didn't share his enthusiasm.

Healthsouth's shares dropped as much as 49 percent and traded lately at $6.49, down $5.48. Other players in the field also took a hit.

Healthsouth's board has approved in principle a plan for a tax-free separation of the surgery-center division. The company expects to complete the transaction by the first quarter of 2003 at the latest, pending approval by the Federal Trade Commission and other regulators.

As a free-standing company, the division would encompass 209 facilities in 37 states and would have annual revenue of more than $1 billion.

Healthsouth itself would remain as a major provider of diagnostic imaging and rehabilitative services.

Changing landscape

Healthsouth's move to pursue a spinoff indicates that still more substantial changes could be afoot in how services are delivered and paid for in the cost-conscious U.S. health-care market.

The company called "unfavorable" a ruling handed down recently by Medicare administrators regarding how outpatient therapy reimbursements.

Specifically, the ruling requires a "group therapy" payment code for Medicare Part B outpatient therapy provided to two or more patients in a single time period, the Birmingham, Ala.-based company said.

This now applies regardless of whether or not the patients were engaged in the same activity and thus "significantly lowers reimbursement for services previously paid as individual therapy," Healthsouth said.

Previously, outpatient providers determined on a case-by-case basis whether a group or individual reimbursement code would apply, depending on clinical judgments and the type of therapy provided.

The company estimated that the change in reimbursements could subtract $175 million a year from earnings before interest, taxes, depreciation and amortization, although it expects to make scheduling and staffing adjustments to reduce the impact of the reimbursement ruling.

Healthsouth executives also said they hold out hope that discussions with the Centers for Medicare and Medicaid Services will yield a more favorable policy on outpatient reimbursements.

Conservative stance

As they spelled it out, the rationale for spinning off its surgery-center operations as a pure play is threefold.

The new company would be able to gain better access to the capital markets and could "grow without concerns" stemming from uncertainty over outpatient reimbursements, Healthsouth said.

In addition, Scrushy noted that outpatient providers have been reluctant to affiliate with Healthsouth in markets where the company also operates rehabilitation facilities.

The spinoff can expect to take advantage of expansion opportunities in these markets, he said. Healthsouth and the spinoff will share various support services while operating on an arm's-length basis.

Analysts reacted cautiously to word of Healthsouth's restructuring.

Moody's Investors Service noted "significant concern" about what the spinoff and the reimbursement changes could mean for the company's cash flow. Moody's put under review ratings covering some $3.5 billion of Healthsouth debt.

And Merrill Lynch cut a total of 57 cents from profit estimates for the second and third quarters, calling the degree to which Healthsouth's earnings before interest, taxes, depreciation and amortization, or EBITDA, will be hurt by the reimbursement changes "very surprising."

For its part, Healthsouth said it's deliberately taking a "conservative interpretation" over the changes in Medicare coding requirements and withdrew profit forecasts for 2002 and 2003.

On a related note, the company made a number of management changes, assigning William Owens as CEO while Scrushy will serve as chairman of both Healthsouth and the new company, to be called Surgical Care Affiliates.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.